How to Reduce Complexity in Procurement Management

Organizations – especially those in the new customer facing' areas such as distribution, technology areas – have always focused on the manufacturing and procurement. These have magic mantra of 'Growth'. Part of this growth has typically been given lower priorities in the past.been achieved through organic growth – increase in the number of products and service offerings, A recent survey of CPOs across industry groups has number of markets served, channels through indicated that this is changing! As Figure 1 which customers are served etc. Another route for illustrates, 'complexity management in growth has been mergers and acquisitions. In procurement' has become one of the top 5 annual addition, rapid technological advancement, feisty objectives for CPOs as part of their savings delivery competitors and demanding customers have programs.forced organizations to be much more aggressive in the way they address their markets. The result – In fact, after procurement professionals exhaust Increased complexity across the value chain! traditional savings approaches viz., rate

negotiations, volume consolidation, and even low Traditionally, company executives have focused on cost country sourcing – complexity management complexity issues that are 'customer-facing'. There becomes the one of the most important tools to are constant reviews of product and service drive significant savings. This paper shares GEP's configurations, brands and product lines, perspective on how to manage complexity and distribution channels and number of SKUs – with drive savings through that in procurement. We an objective of rationalizing these heads and illustrate this through a case study of the work optimizing the overall customer service model. done for a bio-technology major recently.However, these also drive complexity in 'non-

Introduction

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81

85

92

97

Take action to increase supply market competition

Upgrade procurement staff capabilities

Improve coordination with other functions

Spend transparency and compliance

Manage complexity in procurement function

93

80

89

85

48

75

(1)Importance to Strategy

(1) (2) % of respondents Source: CPO survey 2013

Achieve Y-o-Y cost reduction

(2)Being implemented or in-place

Figure 1: CPO response to 'What are the key approaches for driving procurement savings in 2013?'

How to Reduce Complexity in Procurement Management

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Sources of Procurement Complexity

Procurement complexity is driven by multiple factors, as illustrated in Figure 2.

Lack of Processes and Tools for Managing Complexity

Proliferation of Products and Variants

Limited Visibility Across Value Chain

Unclear Lines of Accountability

Limited Understanding of Full Costs

Focus on ‘Quick-Wins’

Complexity Drivers

Figure 2: Key drivers of procurement complexity

Focus on 'Quick-Wins': Proliferation of products and variants:As mentioned earlier, Rapid focus of procurement executives have traditionally growth in sales product and service portfolio been to 'meet savings targets for this year'! This translates directly into exponential increase in the translates into intense negotiations with suppliers, complexity of procured goods and services. As moving businesses to suppliers in low cost country seen in Figure 3, a marginal increase in the number locations as well as volume consolidation with a of SKUs in the sales side translates into a fewer suppliers. While these approaches are significant increase down the value chain in required, it misses the 'forest for the trees'. procurement. This is illustrated in the snap-shot of Continued short-term savings focus can result in a a typical complexity funnel for an instruments proliferation of suppliers, material specifications, manufacturing company.inbound logistic channels as well as related procure-to-pay processes. In the long term, this can add significant complexity in terms of the number of supplier-material combinations to be managed by procurement.

How to Reduce Complexity in Procurement Management

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Figure 3: Complexity funnel to show effect of sales SKUs on procurement

Unclear lines of accountability: Limited visibility across value chain:

Lack of processes and tools for managing complexity:

Limited understanding of full costs:

In most Decisions organizations, decisions are made without made by sales and marketing team about reviewing related processes and impact of the introduction of new brands may not factor in all increased complexity on the same. Sales and the changes in processes required or implications Marketing make decisions regarding brands and for the procurement function – primarily due to product lines with a look at the revenue impact. the organizational silos observed in most While this approach is correct, it is also incomplete. companies.Planning for complexity helps procurement and manufacturing determine the changes they need to incorporate in their functions to manage the Most organizations do not employ a same. For example, introduction of a new SKU structured set of tools and approaches to manage may translate into sourcing multiple raw materials the complexity across the value chain. As a result, from multiple suppliers across new geographies. increased complexity goes noticed but unmanaged

for a long time – translating into higher costs down the value chain.

There is very little analysis done on the impact of increase in complexity across the value chain. This is a result of incomplete understanding of the true costs across the value chain. For example, introduction of a new packaging for a product may have implications for higher packaging costs, more inventory to be maintained, new suppliers to be identified and whole lot of qualification process – especially where the products are used in critical applications such as life sciences or pharma products.

% of sales % of RM inventory% of Cost of Manufacturing

Number of purchased materials

% of Procurement Cost

Core SKUs Growing SKUs Tail- End SKUs

80%15%5% Sales SalesSales

How to Reduce Complexity in Procurement Management

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Procurement Complexity Management Framework

Figure 4: Procurement Complexity Review Model

Our focus for complexity management will be restricted in this paper to the procurement function. Based on our experience with working at multiple client organizations across industry verticals, GEP has developed a structured approach towards managing complexity in the procurement function.

Eliminate redundancies

Harmonize specifications

Consolidate Volumes

Standardize processes

Contract Mfg

Rebranding In-house assembly

Base formulation

Multi-stage

# of RMs

Delivered Pkg

Inbound logistics

Specifications

Products

SKU1

BOM1 BOM2 BOM3

SKU2

ManufacturingProcess

Procurement Process

Product Portfolio

Product- Tree Review

We use the 'Product-Tree review' shown in Figure 4 to determine the impact of each SKU family on the procurement portfolio. This tree is used to identify all the variants across each SKU across processes and purchased materials. This will help in identifying the key variants at each level and the drivers of the complexity. Once the drivers are identified, the next step is to brainstorm on potential ways to reduce complexity. This is achieved through a 4-pronged approach:

Are there any activities that are being duplicated across SKU families? If so, is there an opportunity to delete the duplication of efforts and consolidate into the same process?

Can the raw material specifications be standardized across similar product groups? This can result in volume increase, elimination of multiple inventory requirements as well as cost reduction at the supplier side.

Elimination of redundancies:

Harmonization of specifications:

Volume consolidation:

Standardization of processes:

Can volumes across similar raw materials be consolidated and sourced from a rationalized set of suppliers?

Can quality inspection parameters be standardized for similar raw material groups?

The above questions are typically addressed through joint workshops held with participants from sales, manufacturing and procurement functions. Key pre-requisites for the workshops to be successful include:

(1) Access to detailed data

(2) Open mindedness towards the areas beingscrutinized

(3) Participation of all functions, not justprocurement

(4) Support from leadership

How to Reduce Complexity in Procurement Management

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Business Impact

Complexity management has several benefits, including the following:

Reduction in material costs

Reduction in inbound and outbound packaging costs

More effective product portfolio management for raw materials

Efficiency in supplier relationship management

More bandwidth for materials managers to focus proactively on supply markets

Ÿ

Ÿ

Ÿ

Ÿ

Ÿ

Figure 5: Complexity reduction savings in a bio-technology company

Inbound / Outbound logistics

Process rationalization

New Procurement

Cost

Baseline costs

Raw material

cost

Inbound / Outbound packaging

5 -10%

1- 2%1- 2%

3- 4%

Figure 5 summarizes the results obtained input materials spanning chemicals, biological through the complexity management review for materials and electronic instrumentation resulted a bio technology company. A thorough review in an overall reduction of cost of procurement in of the product portfolio for the company and the range of 10 – 20%.the consequent complexity reduction in the

Unlock savings through complexity reduction

Complexity management is by no means a management is one of the most important 'quick-win' project or a procurement-driven levers that the organization has to drive down program. It is hard-work, requires patience and their overall costs significantly.needs a lot of support from the entire organization. Consistent and holistic complexity

How to Reduce Complexity in Procurement Management

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